Did Deutsche Bank hide $12 billion in losses?

The Financial Times reports that three individuals filed complaints with the SEC alleging that Deutsche Bank hid $12 billion in losses during the financial crisis by mis-valuing its derivative holdings.

Simply put, if it did, that is unacceptable.  If it did not, Deutsche Bank should never have put itself in a position where it could be accused of that behavior.

Whether Deutsche Bank did or did not mis-value its derivative holdings highlights why it is absolutely necessary that banks be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Without this information, market participants do not know what is going on.

I expect Deutsche Bank will be the first large bank to provide ultra transparency.

If it didn't mis-value the derivatives, it prevents future erroneous complaints.

If it did mis-value the derivatives, there is no possible way that it will ever regain the trust of market participants without providing ultra transparency.  After all, what investor would trust anything about Deutsche Bank's financial position knowing they hid $12 billion in losses.  Who knows what else they could be hiding.

Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators. 

The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints. 

All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive. 

Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009. 

Two of the former employees allege that Deutsche mismarked the value of insurance provided in 2009 by Warren Buffett’s Berkshire Hathaway on some of the positions. The existence of these arrangements has not been previously disclosed. 

Deutsche said in a statement that the allegations were more than two and a half years old and were publicly reported in June 2011. It added that they had been the subject of “a careful and thorough investigation”, and were “wholly unfounded”. 

The bank said the investigation revealed that the allegations “stem from people without personal knowledge of, or responsibility for, key facts and information”. Deutsche promised “to continue to co-operate fully with the SEC’s investigation of this matter”.... 

The complainants allege that the bank misvalued the positions by failing to account for losses it faced when the market worsened. Had the proper valuations been made on the positions during the tumultuous period, they allege, the losses for the whole portfolio would have exceeded $4bn and could have risen to as much as $12bn. 

“Self preservation can be a powerful motivator,” said Jordan Thomas, head of the whistleblower practice at the law firm Labaton Sucharow, who is representing Mr Ben-Artzi. 

“During the financial crisis, many financial institutions faced an existential threat and the evidence suggests that Deutsche Bank crossed the line by substantially inflating the value of its credit derivatives portfolio – the largest risk area in its trading book.”